Equities: AIA stake sale boosts first-quarter hopes

A partnership tracing its roots in Asia back almost a century came to an end last month in Hong Kong as US insurer American International Group raised $6.45 billion with the sale of its last remaining stake in AIA group.

Besides its historical significance, the block sale was also the second-largest equity deal in Asia Pacific in 2012 behind the $8.5 billion initial public offering of Japan Airlines in September. Market participants are hoping it could be the sign-off to the year that was needed to make the robust pipeline of secondary and primary market deals in Asia begin to flow in the first quarter of 2013.

Sources close to the deal say AIG’s exit from AIA was priced at the high end of the expected range, adding that AIA stock had been undervalued for some time, meaning fund managers in particular saw it as a great opportunity to get into the stock.

They add that the order book was covered quickly following the deal’s launch as investors jumped at the chance to get into a stock with a solid brand and sound corporate structure, the lack of which had led them to steer clear of many smaller Chinese private firms.

Paying off US bailout

AIG priced its 13.7% stake in AIA at HK$30.30 a share. The sale is part of AIG’s efforts to sell its non-core assets to repay the US government, which bailed it out to the amount of about $180 billion in late 2008 at the height of the financial crisis.

AIG’s presence in Asia dates back to 1919 when Cornelius Vander Starr introduced an insurance agency in Shanghai. Starr was the first person from the west to sell insurance in China. AIG initially left China some 20 years later amid the insecurity caused by the Japanese invasion and local resistance. At this point, Starr established the company’s headquarters in New York, where they remain, and went on to expand worldwide from there.

In February 2012, AIG provided what many at the time also hoped would be the spark that lit the wider equity markets in Asia when it sold the first half of its remaining stake in AIA, raising $6 billion. In the event the equity markets continued for much of the rest of last year in stuttering fashion. Several IPOs were pulled or postponed at the last minute and those that did come to market invariably performed in a less than stellar fashion on the public markets. There were pockets of geographic success, notably in Malaysia and Australia, but in general market sentiment continued to be characterized by caution. Market participants say that one high-profile successful Asian IPO, particularly in Hong Kong, is what is needed to make the wider market rise from its torpor. The problem is that many of the potentially most attractive companies are afraid to come to market lest volatile market conditions lead to a steep fall in price when they debut their shares.

As a result of the uncertainty in the primary equity markets across the region and particularly in Hong Kong, cornerstone investors have become an important part of the market. Without them, even the handful of deals that have been done would have been shelved.

In the most recent example, People’s Insurance Company of China, one of the country’s largest insurers, attracted $1.85 billion from cornerstone investors for its proposed $3.6 billion initial public offering in Hong Kong. This was an unusually large proportion of an IPO to be allocated to cornerstones, which between them typically take somewhere between 10% and 20% of shares on offer. Cornerstone investors are guaranteed access to a company’s IPO within the initial price range but have to agree to a lock-up period, generally of about six months, during which they cannot sell their shares.

In spite of choppy market performance across the continent in the past year, the pipeline for deals in Asia remains strong, with hundreds of companies at a stage where a public flotation is the logical next step in their development. The metals and mining sector is particularly healthy and all eyes will be on the first of the companies that successfully comes to market. A strong debut by one is likely to lead many others to follow suit. According to figures from Ernst & Young, Asia posted a strong performance during the third quarter, accounting for close to 80% of capital raised globally.

Hong Kong slipped down the rankings last year, having been the top venue for IPOs in the previous three years as the string of cancelled deals took their toll. In 2011 companies including Prada, an Italian fashion label, and Samsonite, a US luggage maker, elected to float in Hong Kong. But in 2012, the flotation of UK football club Manchester United, which was mooted for Hong Kong, went to New York and Graff Diamonds pulled its potential listing at the eleventh hour. New York regained the top spot last year.